The financial markets since the beginning of this year have been some of the most volatile that we’ve seen in several decades. And not without good reason. The post-pandemic post-stimulus economic rebound together with supply channels straining at the limits to meet the pent-up demand was further complicated by sanctions imposed on Russia. This strain on our supply channels have sent global inflation to the highest levels in decades. Add in the energy disruptions of the Ukraine war, gasoline and energy price increases have taken a big toll on the markets and the economy. Take note, inflation is not just a U.S. domestic phenomenon. It is global. This fact alone tells us this is not necessarily a dollar monetary problem for the Federal Reserve alone to deal with. It involves many factors beyond those mentioned above and which are largely beyond its control. The Fed however, has no choice but to make its best effort to deal with it with the few tools at its disposal.

The global cooperative response by our allies is showing good progress in mitigating the energy and food disruptions caused by the Ukraine war as shown by falling energy and wheat prices. Energy and wheat prices have fallen to pre-war levels. Oil prices were rising before the war started lending credence that the oil price rise is at least partially related to post-pandemic pent-up demand for goods and travel. Global supply chain pressures have also recently been reduced. The usual inflation predictors, precious metals and commodity prices, are in retreat, an indication that inflation will soon subside. Gold prices are at two year lows. The Fed “could” be less aggressive, but will instinctively try to put a nail in the coffin of this bout of inflation. In doing so it has indicated a willingness to risk a recession. However, the usual and primary recession indicators remain benign at present. There is nothing at this point that the Fed can further do that would surprise the markets, or, that is not already priced into the market. There will be no surprises other than an early and unexpected easing of aggressively tight Fed policy.

But many risks remain. Although the economy is softening and the tight labor markets are easing, construction slack that is developing in the slowing housing market is shifting to new demands appearing in the One Trillion Infrastructure spending that is beginning to hit the streets. The implication is that the construction labor market will remain tight while manufacturing and services labor markets will finally begin to soften.

A war is always and ever has been unpredictable and volatile. Anything can happen that could likely cause a large disruption in the financial markets and to commodity prices and supply chains. With the recent positive developments in inflation and the economy, we believe that there is ample room for the financial markets to stabilize and recover, but that volatility will remain a feature for some time.

As always, we remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joe Toronto

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